Bear market shrinks mutual fund universe

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What to do

If your fund merges into another, here are some considerations:
Evaluate managers: Examine whether the person or team overseeing the fund you’re shifting to appears as skilled and experienced as management at the old fund. If not, look elsewhere.
Watch fees: Generally, a fund merging into another won’t charge you a redemption fee to pull out. But you might face a “load” or sales fee if a commission-based adviser helps you shift to a new fund. If you move, consider whether the change is still worthwhile after the extra fee.
Beware the taxman: Anytime you’re moving from one fund to another, be careful. Check to see whether you might be triggering capital gains taxes from a fund’s past investment returns. One easy way is to plug a fund’s ticker symbol into Morningstar’s Web site and click the “tax” tab.
Check the fit: Consider whether the fund’s investment strategy is more or less the same as your old fund. Assuming you were in the right fund in the first place, there should be a close match. If the new fund invests in riskier areas than your old fund, expect more volatile returns.

BOSTON – Call it survival of the fittest, or a thinning of the herd.

On the heels of a vicious bear market, mutual fund closures and mergers are on the rise. The pace is so rapid that 2009 is shaping up to be the first time in seven years that the universe of nearly 8,000 funds is shrinking rather than expanding.

Through early November, almost 500 funds had disappeared, according to Morningstar. That’s about twice the total of new funds launched this year. The last time closures outnumbered launches was 2002, when the bursting of the dot-com bubble forced the fund industry to downsize.

For investors getting fund liquidation or merger notices in the mail, it’s decision time. If you’re typically slow in choosing how to put your money to work, this is one instance where moving quickly might pay off.

“It’s definitely a call to action,” says Russel Kinnel, Morningstar’s director of fund research. “Generally, you want to be a patient investor who doesn’t hop around a lot. But this is one time when you definitely want to be aggressive, and get moving.”

If your fund is shutting down, it’s largely a question of whether to put your returned cash into another fund, stash it elsewhere or spend it.

It gets a little trickier with mergers. You’ve got to decide whether the new fund you’re being merged into is a good fit.

This month, the Philadelphia Fund began merging into a larger offering with a similar investment style. The new fund, WHG LargeCap Value, boasts a four-star Morningstar ranking just like Philadelphia. It also has guaranteed it will charge Philadelphia investors annual expenses of no more than 1 percent for at least a two years, down from the 1.57 percent they had been paying.

That’s proved sweet enough to bring about 90 percent of Philadelphia Fund’s clients into the new fund, with the rest taking their money elsewhere, fund treasurer Ron Rohe said.

A merger isn’t necessarily cause for an investor to shop around. Often, the new fund can prove equal or better than the one closing.

After all, many funds merge or close over poor performance that sends investors fleeing. The average Morningstar rating of funds vanishing this year is 2.43 stars – just below the midpoint of its 5-star rating system, which measures past performance.

In other instances, funds disappear because they’re chasing such a specialized investment niche, such as stocks of mining companies or Japanese firms, that they draw very select clients. Or they’re overlooked because they’re too similar in style to more successful funds that can charge less because they’ve got more assets.